Fitch Rating: Fever of external reserves depletion spreads on

By Babajide Komolafe
From the local money mar-ket, to importers and other heavy users of foreign exchange, and now to the international investment community, the fever generated by the persistent depletion continues to spread.

Reflecting the reality of this fever, Fitch Rating two weeks ago, downgraded the nation’s sovereign credit rating from “stable” to “negative”. “The depletion of the Excess Crude Account and continued gradual fall in international reserves at a time of high oil prices and record high oil production is a major concern,” Fitch said in a statement.

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Although, Fitch also attributed the downgrade to increased short term_term and political uncertainty due to the forthcoming election, it is obvious its decision was prompted by the depletion of the external reserves.

While the downgrade was considered “hash” by the Finance Minister, Mr. Olusegun Aganga, financial sector operators however consider it fair reflection of reality.

“Why I do not necessarily agree, I understand why they took the decision”, said Victor Ogiemwonyin, chief executive officer, Partnership Finance and Investment Limited. Reacting to the downgrade, he said, “The down grade is a serious problem because it will price our cost of National borrowing up, if we don’t quickly create our sovereign Wealth Fund which is what we hope to replace the Excess Crude Account with.

We recently shared the balance and fully exhausted what was left. The down grade means that our National balance Sheet is more risky and there is no cushion for Lenders and the foreign Exchange cover is very low. This is even more worrisome because, oil is selling at a fairly high price now. I. am puzzled that we did not use the balance to start the SWF which would have saved us the down grade.”

According to Razia Khan of Standard Chartered Bank, Fitch’s decision is not “Unexpected”.

“Given the depletion of the excess crude account and the near_term fiscal pressure Nigeria is experiencing, the Fitch move _ revising the outlook on Nigeria ’s rating to negative from stable, while affirming the BB- rating, is not entirely unexpected,” she stated

“Truth is bitter,” said Omolara A, a foreign exchange market expert, “We condemned rating institutions in ‘the past for the financial crisis. Yes, the Nigeria rating might be harsh, what with the trend in our declining reserves in the period of increased price and quantity sold.

What about the ballooning domestic debt. What have they used the money four? What do you say about the inconsistencies in policy designs? Please let us not be sentimental but bend down and work hard to retrieve are good image”

The depletion of the nation’s external reserves from the peak of $58 billion in March 2008 to the present level of $33.9 billion was prompted by the impact of the global crisis.

The crisis caused sharp drop in oil earnings via fall in crude oil prices from peak of $140 dollars per barrel to almost $30 per barrel. There was also massive capital outflow as foreign investors pulled out of the economy in response to the crisis, and huge foreign exchange demand in the official foreign exchange market, as foreign exchange users increasingly rely on the Central Bank of Nigeria due to little or no autonomous inflow of foreign exchange rate.

But, despite amelioration of the impact of the crisis, external reserves continue to decline and this is due to persistent draw down of the excess crude oil account (ACA).

To augment the decline in federal collected revenue prompted by the fall in oil revenue, the three tiers of government monetised and shared the money from the account till it fell to the present level of zero.

The first wave of concern about this development occurred in towards the end of the second quarter in the foreign exchange market, where operators expressed concern that the naira exchange rate was not did not reflect the almost 50 per cent drop in reserves. They were of the opinion that the CBN should depreciate the naira in tandem with the new levels of the reserves.

But the apex bank did not agree with this view, arguing that the with level of reserves covering import for 17 months, there is no cause for alarm. However, the their quarter of the year witnessed sharp increase in demand at the official market with the apex bank having to conduct special auction to douse the tension, which saw the official exchange rate rising to touch the N150 per dollar mark.

While the apex bank came out with a publication to justify the huge increase in foreign exchange demand, Khan however believe that this is more as a result of nervousness about the continued stability of the naira occasioned by the depletion of reserves and aggravated by uncertainties about the outcomes of the 2011 elections.

This nervousness, she noted has occasioned importers to “front load foreign exchange demand”, i.e bringing future purchase to the present. “FX commitments not due for several months, in some instances years, are being brought forward,” she said in a report titled, “Nigeria: Who Blinks first?”

The Fitch rating on Nigeria indicate that this nervousness has spread to international investors and would probably continue to spread till there is more uncertainty about the coming election or build_up of the external reserves.

While Fitch, Khan and other market analysts agree that the nation’s fundamentals are still strong and there is hope due to on_going reforms, the general believe however is that building_up the external reserves is the surest way of restoring confidence. “With a healthy current account surplus, often thought to be in double_digits as a percentage of GDP, it is difficult to see why Nigerian reserves cannot be replenished. For now, it is key to the restoration of confidence,” Khan concluded in her report.